The State Bank of Pakistan (SBP) has taken a significant step to bolster Shariah compliance in the Islamic banking sector by mandating the adoption of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No. 20. This new regulation pertains to the Sale of Commodities in Organized Markets and has been enforced with immediate effect across all Islamic banks, Islamic banking subsidiaries, and conventional banks with Islamic banking branches.
In a circular issued on March 21, 2025, the SBP outlined its decision to implement the AAOIFI Shariah Standard No. 20 in order to standardize industry practices and ensure higher levels of Shariah compliance within the Islamic banking industry. This move aims to align the sector with global best practices while maintaining the integrity of Shariah-compliant financial services.
The circular emphasizes that the adoption of the new standard will be subject to any future amendments or clarifications that may arise, ensuring that it remains consistent with evolving regulatory and Shariah requirements. The SBP further clarified that the new standard will complement the existing regulations, instructions, and directives already in place, underlining that this is not a replacement of the current framework but an enhancement to it.
The adoption of AAOIFI Shariah Standard No. 20 is designed to address specific aspects of Islamic finance, particularly the sale of commodities in organized markets. By integrating this standard, the SBP aims to ensure that the sale of goods in these markets remains fully compliant with Shariah principles. This includes ensuring that transactions involving goods and commodities are conducted in a way that prevents any form of speculation (known as “gharar”) and aligns with the ethical principles outlined in Islamic law.
The integration of this standard is part of the SBP’s broader effort to foster a more robust and transparent Islamic banking system in Pakistan, ensuring that the industry remains competitive and compliant with both local and international Shariah standards. This move also helps to address the growing demand for Shariah-compliant financial products and services, which have seen significant growth in recent years in Pakistan and across the Muslim world.
In the circular, the SBP made it clear that banks failing to implement the AAOIFI Shariah Standard No. 20 in their operations may face penalties. Specifically, non-compliance could lead to legal action under the Banking Companies Ordinance, 1962. This measure serves as a strong deterrent against non-compliance and emphasizes the importance of maintaining rigorous Shariah adherence in the Islamic banking sector.
Islamic banks and financial institutions will now be required to align their operational practices with the new standard, which covers key aspects of commodity transactions, including the sale and purchase of goods in organized markets. To assist with this transition, the SBP has likely put in place mechanisms for guidance, support, and monitoring of the implementation process.
The move to adopt AAOIFI Shariah Standard No. 20 is seen as a major milestone in Pakistan’s Islamic banking sector. It will bring the country’s Islamic banking practices in line with global standards, enhancing their credibility and appeal, particularly among international investors looking for Shariah-compliant investment opportunities. Additionally, it strengthens the role of the SBP in overseeing the growing Islamic finance sector and ensuring that it operates in a regulated and transparent manner.
As the Islamic banking sector continues to expand in Pakistan, it is crucial for regulators like the SBP to ensure that banks adhere to globally accepted standards. This will not only enhance consumer trust in Islamic financial products but also boost the country’s position as a key player in the global Islamic finance market. The adoption of AAOIFI Shariah Standard No. 20 is a step in the right direction towards achieving these goals, providing a more standardized, reliable, and ethical framework for the Islamic banking industry.